$4.6 Trillion Later, Foreign Aid Remains An Economic Somnolent
By Philip D.Harvey
9/26/2012 _at_ 3:45PM |148 views
The governments of the Western industrialized world have provided over $4.6
trillion (in constant 2007 dollars) to the world's less-developed countries
(LDCs) over the past 50 years, the equivalent of several Marshall Plans.
Some of this has been extremely useful: Treatments for HIV/AIDs, food to
prevent starvation, and support for immunization programs, for example, have
saved lives and enhanced our universal humanity.
But the focus of much foreign aid, especially in the past two decades, has
been aid for the purpose of advancing economic development. This part hasn't
worked very well.
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http://blogs-images.forbes.com/realspin/files/2012/09/September-14-Foreign-a
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The graph shows the relationship between the foreign aid received per capita
in 131 developing countries during 2000-2005 (horizontal axis), and the rate
of economic growth in those countries in the subsequent five years
(2005-2010; vertical axis) as measured by the percent increase in gross
national income. As you can see, there is a noticeable negative correlation,
that is, increased flows of foreign aid are associated with somewhat lower
economic growth. While this does not prove that foreign aid actually impedes
growth, it is powerful evidence that such aid does little or nothing to
improve it.
Economist Peter Bauer pointed out some of the reasons for this some years
ago, including the fact that foreign aid tends to end up under the control
of the elites in developing countries. A related reason is the fact that aid
to LDC governments makes it possible for them to postpone necessary reforms.
The leaders of a recipient country may know that they should free up trade,
facilitate new business formation, streamline licensing procedures, and
improve protection of private property. But if there's enough donor money to
keep things going, these steps can be postponed.
Haiti and Ethiopia are prime illustrations. No one produces mangos on much
of Haiti's good mango soil in large part because no one has clear and
enforceable title to the land on which they can be grown. Ethiopia is so bad
about granting land title to its own farmers (and agricultural productivity
is so poor as a result) that the government is now issuing 99-year leases to
foreign companies to come in and farm Ethiopia's excellent soil.
Even when a benefactor like the World Bank imposes conditions that favor
freer markets, those conditions seldom touch policy issues like land titles,
and the flow of donor funds makes all such changes less urgent; reforms can
be postponed indefinitely.
Donor funds also often work against economic development by causing
government bloating at the expense of the private sector. When the
government takes over much of the health or communications sectors, for
example, private entrepreneurs are barred from those opportunities. Further,
governments are often not very good at these functions, and cronyism is
likely to creep in. Members of the chief minister's own tribe or extended
family are likely to get hired for those choice positions. Corruption is not
uncommon. All of which exacerbate the initial inefficiency.
Democracy may be impeded as well. A government that depends more on foreign
aid for its operating budget than on taxes paid by its own citizens becomes
answerable, not to its own citizens but to the donor governments. Thus, when
donor funds are flowing, the citizen-taxpayers often get short shrift. And
barriers to free and responsive government are often barriers to economic
freedom-and development-as well.
Foreign aid is best applied through private channels, for short-term
emergencies, and/or for causes that are politically popular almost
everywhere, like immunization. Propping up the finances of developing
countries' governments is likely to do more harm than good.
Philip D. Harvey heads DKT International, a nonprofit family planning
organization. He has participated in foreign assistance programs since 1970.
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Received on Wed Sep 26 2012 - 17:25:50 EDT
